U.S. Interbank Lending Market Again Severely Short of Liquidity

Jan. 7, 2020 (EIRNS)—The Federal Reserve’s attempt to start withdrawing liquidity from the interbank repurchase-lending market on Jan. 3 and Jan. 6 failed, with oversubscribed “repo” loan offers returning and a spike in demand for the “not-QE” purchase of short-term Treasuries by the Fed.

After more than two weeks through the year-end in which the Fed emergency loan offers had not been fully subscribed—they had been dramatically increased so as not to be—unmet liquidity demand reappeared with a vengeance on Jan. 5-6. The New York Fed had to inject $99 billion in liquidity over the period with $15 billion more in demand going unmet.

On Tuesday afternoon it made a second attempt to drain liquidity by conducting a “reverse repo” operation where the Fed is the seller in the repurchase contracts. Only $1.5 billion showed up.

Moreover, Tuesday’s security-purchase operation (“Not-QE”) was quote oversubscribed, with more than $25 billion in Treasuries offered compared to the usual $7.5 billion bought.

This is not a new crisis, but the same developing crisis of overexposure to bad debt and derivatives losses in the financial sector, some minor and perhaps some major player(s) on the verge of blowout as the financial crisis unfolds.